As China takes over top economic spot from U.S., is reserve currency next?

On Oct. 8, China officially took over the top spot as the world’s leading economy, hurdling over a declining U.S. according to metrics and models used by the International Monetary Fund (IMF). And as the rest of the world quickly opens up their banking systems and swap lines to accommodate the Chinese Yuan and bond offerings, is the reserve currency torch about to be passed as well, as reliance and trust in the dollar continues to wane more and more each day?

In 1944, delegates met in Bretton Woods, NH to discuss and vote on a new monetary system and global reserve currency. From this, and subsequent meetings in 1945, the commission would eventually assign the privilege to the United States as they were deemed to be the most stable and powerful economy in the aftermath of World War II. Additionally, U.S. held gold reserves would be the backstop for the global reserve currency, and nations could trust that the use of dollars would ensure stability and relative prosperity to their own economies.

But 70 years later, the U.S. no longer has the world’s strongest economy, nor the gold reserves to back a reserve currency, and the time appears to be now for China to takeover this mantle after decades of dollar hegemony.

Sorry, America. China just overtook the US to become the world’s largest economy, according to the International Monetary Fund. Chris Giles at the Financial Times flagged up the change. He also alerted us in April that it was all about to happen.

Basically, the method used by the IMF adjusts for purchasing power parity, explained here.

So the IMF measures both GDP in market-exchange terms and in terms of purchasing power. On the purchasing-power basis, China is overtaking the US right about now and becoming the world’s biggest economy.

We’ve just gone past that crossover on the chart below, according to the IMF. By the end of 2014, China will make up 16.48% of the world’s purchasing-power adjusted GDP (or $17.632 trillion), and the US will make up just 16.28% (or $17.416 trillion): – Bloomberg

In fact, America’s actual GDP may be much worse than these numbers indicate. In the past, the U.S. used to measure GDP based on actual production and output, with smaller segments of the annual number being tied to consumer spending and miscellaneous other revenue streams. However, as America transformed into a primarily consumer based economy, and industry fled Eastward or towards Mexico, additional data streams such as government and military spending were added to make the GDP appear to be continuously growing rather than declining.

And even in Europe today, some EU nations are projecting consumer spending sales on booze and hookers to ensure their economies don’t measure statistically as in decline or in recession.

The key behind China’s currency eventually becoming the global reserve has been its ability to float the Yuan, and find acceptability in most nations that currently accept the dollar as money. These key fundamentals have nearly been accomplished already however, as over 23 of the biggest banking systems have established swap lines to handle the Yuan internationally, and Russia has signed with China on to allow oil sales to take place in both Roubles and Yuan, thus answering the question of how to deal with the global petro-dollar system.

The parameters for America becoming the keeper of the global reserve currency after World War II were its status as the world’s largest economy, and its ability to provide a global currency backed up by physical gold reserves. But 70 years since this agreement was signed and ratified, the U.S. no longer is the top economy, nor does it back its currency with gold, and there is only one nation that fits both criteria, and it will not be long before the rest of the world willingly votes with its voice or wallets to put its trust in the new top global economic power.